Thursday, August 6, 2009, 10:41 AM

SEC Proposes Pay-to-Play Rules for Pension Fund Industry

The SEC voted on July 22 to propose new rules restricting campaign contributions by investment advisors seeking contracts from public pension plans. The proposed rule is similar to draft Rule 206(4)-5 that the SEC considered in 1999, and is based on an existing rule – MSRB Rule G-37 – that applies to municipal securities dealers. Under the draft rules, an investment adviser would be barred from providing compensated advisory services if that adviser, or certain of its executives or employees, makes political contributions to public officials with influence over their selection, or to candidates seeking such public offices. The two-year "time out" on compensated work would also apply to any employer who subsequently hires a covered employee who has made a prohibited contribution.

The draft rule contains two anti-circumvention measures. Advisers cannot ask other persons or PACs to make contributions to covered candidates or their state or local party committees. In addition, an adviser cannot funnel contributions through third parties such as spouses, lawyers or other companies. Unlike the 1999 draft, this proposal also bans advisers from paying third parties, such as placement agents, to solicit a government client on behalf of the investment adviser.

The rule has a de minimis exception that allows a covered employee of an adviser to make a contribution of up to $250 per election per candidate, but only if the contributor is eligible to vote for the candidate.

The SEC’s proposal follows on the heels of efforts in several states to target influence peddling in the pension industry. As we have reported previously, states including California, Texas and Oklahoma have restricted campaign contributions or prohibited the use of placement agents, and New York Attorney General Cuomo recently created a "Public Pension Fund Reform Code of Conduct," which was adopted by The Carlyle Group as part of a $20 million settlement of a “pay-to-play” investigation.

The SEC's proposed rule can be reached through this link. Interested parties have 60 days to submit comments once the proposal is printed in the Federal Register.

FEC Busts Law Firm for Reimbursing Employee Campaign Contributions

A Pennsylvania law firm paid $155,000 to settle charges with the Federal Election Commission, after the Commission found probable cause that the firm reimbursed campaign contributions made by employees and their family members. According to an investigation report released by the FEC, certain reimbursement checks contained notations indicating that the reimbursements were actually bonus payments to the employees. FEC staff, however, found these notations unpersuasive because, among other things, the firm's payroll records did not reflect that these checks were bonuses and the amount of the checks coincided with contributions contemporaneously made by the employees. Also, some employees allegedly involved in the scheme invoked their Fifth Amendment privilege against self-incrimination and declined to cooperate.

With a new campaign season upon us, this FEC settlement serves as a timely reminder that employees may not be reimbursed for contributions to federal candidates, either by the company that employs them or by anyone else who works for the company. These are known as "contributions in the name of another." As the FEC investigative report noted, in these cases "the true source of funds is withheld from the recipient committee, the FEC, and the public," and therefore "is inherently self-concealing." Beware: these schemes are not just fodder for the FEC. The Justice Department has brought criminal charges in these types of cases, and is not foreclosed from taking action merely because action is taken by the FEC. And most states also prohibit these types of conduit schemes.

OMB Issues New Guidance on Lobbyist Restrictions

As we reported previously (see June 2 GPS), the White House in late May eased its earlier restrictions on lobbyist communications with government officials regarding stimulus-funded projects. In an unusual move, that change of policy was announced through a blog entry by Norm Eisen, special counsel to the President for ethics and government reform. More detailed guidance, which was promised at the time, was issued on July 22, 2009, in a memorandum from OMB Director Peter Orszag.

The thrust of the new guidelines is as promised on the blog. The restriction on oral (in- person or telephone) communications regarding Recovery Act projects now applies not just to lobbyists, but to all outside parties that seek to influence the funding process. However, the speech prohibition now applies only from the time a person or entity submits a formal application for a competitive grant or other request for financial assistance under the Recovery Act to the time funds are rewarded. In this way, the prohibition mirrors restrictions on procurement lobbying in many states.

Registered lobbyists are, nonetheless, still singled out for special treatment. Communications between lobbyists and government officials outside the above-described black-out period must be summarized and posted on the agency's website. Each agency is also required to post any written communications submitted by lobbyists. But there's an important loophole here: no disclosure is required concerning communications between a currently-registered federal lobbyist and government officials, if the lobbyist is not communicating on behalf of a client for whom he or she is registered. For instance, a federal lobbyist may confer with officials in his or her personal capacity, and the exchange need not be disclosed by the agency. This also means that disclosure is not required if a lobbyist confers on behalf of a client but was retained to make only one contact and, therefore, does not trigger registration obligations. The disclosure provisions also do not apply to communications by state-registered lobbyists, lobbyists who have previously terminated their federal registration, or non-lobbyist employees of an organization registered under the federal Lobbying Disclosure Act.

More LDA Referrals to Department of Justice

The Secretary of the Senate's office recently reported that it has referred to the Justice Department a total of 5,596 instances of non-compliance since the inception of the Lobbying Disclosure Act. According to BNA's Money & Politics Report, over 1700 of these matters were referred last month. While the U.S. Attorney's office has yet to exercise the authority granted in 2008 to treat these violations as federal crimes, no registrant wants to be on the receiving end of a "compliance letter" from the Justice Department. In addition, the U.S. Attorney has reported progress in identifying habitual LDA violators and in tracking LDA referrals.

Womble Carlyle Files Supreme Court Brief Challenging Election Ad Ban

Womble Carlyle filed a brief last week in the U.S. Supreme Court on behalf of ten state broadcaster associations. The case is Citizens United v. FEC, where the Court is considering whether to strike down the federal ban on independent corporate and union expenditures for election-related communications.

The brief argues that the McCain-Feingold law unconstitutionally singles out broadcast media (as well as cable and satellite) by barring corporate and union political ads during the weeks prior to an election. A copy of the brief is linked here.

Norton and Kahl Submit Comments to FEC on Improving Commission's Website

Larry Norton and Jim Kahl filed comments with the FEC regarding the accessibility of information on the Commission’s website. The comments note difficulties in accessing campaign records and searching the files of closed enforcement matters, and include suggestions for making the website more user-friendly. The FEC solicited public comment on these matters through a notice published in the Federal Register.

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